Crowd Funding

Crowd funding is a method of raising capital from a large number of relatively small contributions and at the same time raising brand awareness from the target market. Investors are usually consumers and can be sourced globally. There are two types of crowd funding:

The more simple of the two is the reward based model where companies typically seek specific amounts in return for early versions of products once released. The investors are future customers, who (if all goes well) will receive the product at a discounted price in return for paying up front and with the risk that the development may not deliver the product as conceived.

Kickstarter and Indiegogo are the two dominant platforms alongside Pozible in Australia, and if you use the international platforms then costs involved can be claimed under an EMDG grant application.

The second type is the equity model where companies offer shares for sale. This does not require an IPO and there are rules and restrictions around who can participate and how much can be raised.

Birchal, OnMarket and Equitise are the three biggest platforms in Australia on which to run equity crowdfunding. They provide the management of the campaign in exchange for a %age of the investment raised. Campaigns typically have a minimum which if it isn’t achieved, none of the Expressions Of Interest (EOI’s) up to that point are converted to investments.

This works well for companies that are pre-commercial, or whose product has a long development cycle or is a B2B offering. Although some Angels will use equity crowd funding platforms, they are typically unsophisticated consumer-investors gambling smaller amounts – a few thousand, sometimes only a few hundred dollars. However, all those small investors are then pooled, usually under a nominee set up by the platform (to avoid an over-complicated cap table).

Companies raising via equity crowdfunding, must issue annual reports to those shareholders, but do not have to hold an AGM, and the shareholders are not given voting rights.